1957 (4) TMI 63 - HC - Income Tax

High Court: Settlement payment not deductible as business expense under Income-tax Act

DALMIA JAIN & CO., LTD. Versus COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA

The High Court ruled against the assessee, holding that the payment of Rs. 4,25,000 to settle a lawsuit was not deductible as a business expense under ... - Issues Involved:1. Whether the amount of Rs. 4,25,000 paid by the assessee to Messrs. Chimanram Motilal is an expenditure wholly and exclusively incurred for the purpose of trade and deductible under section 10(2)(xv) of the Indian Income-tax Act.2. Whether there is material before the Appellate Tribunal for reaching the finding that the memorandum of the oral agreement, dated 1st March, 1947, was not a genuine document.Issue-wise Detailed Analysis:1. Deductibility of Rs. 4,25,000 as Business Expense:The assessee, a private company, claimed a deduction of Rs. 4,25,000 paid to Chimanram Motilal as a business expense under section 10(2)(xv) of the Indian Income-tax Act. The payment was alleged to settle a lawsuit filed by Chimanram Motilal against the assessee and Ramkrishna Dalmia. The assessee argued that the payment was made to terminate an inconvenient trading relationship.The Tribunal disallowed the claim, finding no trading relationship between the assessee and Chimanram Motilal. It concluded that no money was advanced to the assessee by Chimanram Motilal, and the memorandum of oral agreement was not bona fide but created to support the assessee's case.The High Court held that the principle of compromising a disputed claim made bona fide applies only if the compromise is bona fide. The Tribunal did not find the compromise bona fide, and the High Court could not accept the assessee's argument without such a finding. The Court emphasized that the validity of the compromise is irrelevant to the question of whether the expenditure was laid out wholly and exclusively for the business. The Tribunal's findings were based on the materials produced, and the High Court found no reason to interfere with these findings.2. Genuineness of the Memorandum of Oral Agreement:The Tribunal found that the memorandum of oral agreement dated 1st March 1947 was not genuine. The assessee contended that this point was not argued before the Tribunal and that there was no material to support the Tribunal's finding.The Tribunal provided five reasons for its conclusion, including the absence of solicitors during the agreement, the undated memorandum, lack of oral examination of executants, and the relationship between the parties. The High Court found that the Tribunal's conclusion was reasonable and supported by proper material.The High Court emphasized that the cumulative effect of all the facts should be considered, and the Tribunal's finding was based on a reasonable assessment of the evidence.Conclusion:The High Court answered both questions against the assessee and in favor of the Income-tax Department, holding that the payment was not deductible as a business expense and that the memorandum of oral agreement was not genuine. The assessee was ordered to pay the costs of the reference.